The unstable nature of the markets have investors spooked; however, many are turning to Direct Reinvestment Plans (DRIPs), also referred to as Dividend Reinvestment Programs. DRIP is an equity option that appeals to people who are skittish about investing. Because the shares are offered directly through the company, investors can purchase shares using a very small amount of money.
Obtaining a Fair Share
Unlike other investment products, DRIPs allow investors to buy a fraction of a full share. In a nutshell, investors build their portfolio through an automatic reinvestment system that applies the dividend to in the underlying equity usually on a monthly basis. For instance, invest $20 in a stock that trades for $100 per share, the DRIP will acquire one-fifth of a share of that particular stock and keep purchasing each month using the dividends the account earns.
Vita Nelson, editor of the Moneypaper said in the October 17, 2008 Reuters article, “In today's environment, maybe they [investors] feel the big well-known companies are better places to store your cash and get dividends than banks.” In the long term, DRIPs are a sound way to grow money. With time, the money that is invested back into the stock helps investors accumulate more shares, which translates into more dividend income.
According to Harry Domash, publisher of The Dividend Detective website, investors can put $100 in the market every month, if they achieve the market's 11 percent long-term average annual return the account would be worth $21,900 in 10 years to upward of $280,000 in 30 years. While enrollment and maintenance of a dividend reinvestment plan is not always free, DRIPs are well worth the effort as it helps investors put their money to work.
The DRIP Advantage
1. DRIPs are a cost-effective way build a portfolio by obtaining shares over time using dividends to reinvest.
2. DRIPs help investors make consistent stock purchases by requiring that they hold the stock long-term, investors get the benefit of increased value over time.
3. Investors can avoid brokers and brokerage fees using DRIPs because of its automatic reinvestment system.
4. There are usually no costs involved in joining or leaving the DRIP program. However, some companies may require investors to purchase one full share when they enroll.
5. DRIPs enable investors to purchase stocks directly from over 1,500 public companies like Coca Cola, Hormel Foods Corp., Kellogg Company, Kimberly-Clark Corp., The Hershey Company, Xerox Corp., and many more. Individuals interested in seeing a complete list of participating companies should refer to the DRIP Investment Resource Center.
For more information about how to start investing through DRIPs, please visit ING Direct.
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